Ha-Joon Chang offers a masterful debunking of some of the myths of capitalism, writes John Gray

A worker on a construction site in Suining, in China's Sichuan province. Western capitalism is likely to decline in the face of competition from China, India and Russia. Photograph: AFP/Getty Images

The world is awash with books that claim to explain the global financial meltdown. Not many are written by economists. Ignorant of history, including that of economics itself, most economists not only failed to forecast the crash but, mesmerised by the spurious harmonies of their mathematical models, were blind to the mounting instability of the financial system and failed to grasp that an upheaval of the kind that is currently under way was even possible. After an intellectual failure on this scale, what could economists have to say today that would be of any interest to anyone?

23 Things They Don't Tell You About Capitalism by Ha-Joon Chang

Anxiously defending their turf, many have objected that they never claimed to predict the future. But as Ha-Joon Chang writes: "Economists are not some innocent technicians who did a decent job within the narrow confines of their expertise until they were collectively wrong-footed by a once-in-a-century disaster that no one could have predicted." Far from being an inward-looking, hermetic discipline, economics has been a hugely powerful – and profitable – enterprise, shaping the policies of governments and companies throughout much of the world. The results have been little short of disastrous. As Chang puts it: "Economics, as it has been practised in the last three decades, has been positively harmful for most people."

In his 2008 book, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, Chang – an economist himself, a specialist in the political economy of development – mocked one of the central orthodoxies of his profession: the belief that global free trade raises living standards everywhere. 23 Things They Don't Tell You About Capitalism assaults economic orthodoxy on a much larger front. Dip into this witty, iconoclastic and uncommonly commonsensical guide to the follies of economics, and, among many other things, you will learn that free market policies rarely make poor countries richer; global companies without national roots belong in the realm of myth; the US does not have the highest living standards in the world; the washing machine changed the world more than the internet; more education does not of itself make countries richer; financial markets need to become less, not more efficient; and – perhaps most shocking to Chang's colleagues – good economic policy does not require good economists. Each of Chang's 23 propositions may seem counterintuitive, even contrarian. But every one of them has a basis in fact and logic, and taken together they present a new view of capitalism.

Chang may be our best critic of capitalism, but he is far from being any kind of anti-capitalist. He recognises the failings of centrally planned economies, and rightly describes capitalism as "the worst economic system except for all the others". At the same time he is confident that capitalism can be reformed to prevent crises like the one we have just experienced recurring. Making markets more transparent is not enough. "If we are really serious about preventing another crisis like the 2008 meltdown," Chang writes, "we should simply ban complex financial instruments, unless they can be unambiguously shown to benefit society in the long run." He is aware that he risks sounding extreme, but argues that the ban he proposes is no different from those that have been enforced on other dangerous products. "This is what we do all the time with other products – drugs, cars, electrical products and many others."

It is at this point that Chang's analysis, otherwise refreshingly down to earth, seems to me to become unrealistic. Banning opaque financial products might be a step towards a safer world. Unfortunately it is also politically impossible. In the US, Obama's economic policies are being shaped by the same people – many of them with close links to Wall Street – who dismantled Roosevelt's curbs on the banking system during the Clinton era. American politics has been captured by a financial oligarchy, and there is no prospect of meaningful reform.

Again, Chang urges that we ban financial derivatives, but who are "we"? Reforms of the kind he envisions require a type of global governance that will not exist in any foreseeable future. As he himself recognises, capitalism is not one economic system but many. "There are different ways to organise capitalism. Free-market capitalism is only one of them – and not a very good one at that. There is no one ideal model." This is clearly right, but the types of capitalism that exist today are not just different. They are also competitors, with conflicting needs and goals. Chinese capitalism, Russian capitalism, Indian capitalism and American capitalism are geopolitical rivals as much as they are different ways of organising the marketplace, and they threaten one another in a number of contexts – not least when they are struggling to secure control of scarce natural resources. Many of the world's conflicts are driven by these geopolitical rivalries. Afghanistan will enjoy nothing like peace when western forces are finally compelled to leave. Instead it will become a site of conflict between India, Pakistan, China, Russia and Iran, each aiming to pre-empt the others in exploiting the opportunities offered by the country's geography and resources.

Capitalism is not only about creating wealth, it is also about power – and western power is waning. Economic energy is shifting to the emerging countries, while in the west economies stagnate and politicians continue to worship at the altar of the free market (not least in Britain, where the coalition seems bent on pursuing neo-Thatcherite policies more extreme than those of the 80s). Rather than reforming itself, free-market capitalism looks set simply to decline. But if Chang's reforms are unrealistic, his account of where we find ourselves today is arrestingly accurate. For anyone who wants to understand capitalism not as economists or politicians have pictured it but as it actually operates, this book will be invaluable.

John Gray's latest book, Gray's Anatomy: Selected Writings, is published in paperback by Penguin